How Will Changes in Globalization Impact South Asia?

Submitted by Ejaz Ghani On Wed, 11/25/2009

Globalization has accelerated global growth and global poverty reduction. But it has also raised concerns. The current global crisis may change globalization itself, as both developed and developing countries adjust to global imbalances that contributed to the crisis. Will these changes help or hinder economic recovery and growth in South Asia?

There are three models of globalization. These include (a) trade flows (exchange of goods), (b) capital flows (exchange of money), and (c) macroeconomic management. These three models of globalization may not be the same in the future. Changes in globalization could change the composition of trade flows, capital flows, and economic management, which in turn, could accelerate or restrain growth. So how will changes in these three models of globalization impact economic recovery and growth in South Asia?

South Asia as a region is peculiar. Its trade, capital flows, and economic management differ from other regions in how the region has globalized, although it must be mentioned that there is a lot of diversity within the region.

Its trade characteristics are different from that of East Asia. While East Asia benefitted from an export led growth strategy based on manufactured goods, the size of manufacturing sector in South Asia is relatively small. There are some examples of success in garment exports from Bangladesh/Sri Lanka, and in this sense its experience is no different from East Asia. But most South Asian countries have much larger service sectors. They seem to have benefitted more from modern service exports and traditional service exports such as remittances.

India's growth has been spearheaded by exports of modern services and less by goods exports. Remittances and traditional service exports are very important to Bangladesh and Nepal. Are service exports as vulnerable as goods exports to the global downturn? There seems to be emerging evidence that service exports are more resilient compared to goods exports. Globalization of services is still at an early stage. So, as consumers pull back in the United States, service trade is likely to be less impacted compared to goods trade, as consumers and firms still want to access more and cheaper services, and benefit from outsourcing.

Can the loss in external demand and reduced trade flows in goods and services be compensated by increased trade in ideas/knowledge and technology? Trade contributes to growth not only through trade in goods but also trade in ideas and technology. These have huge spillovers and externalities and enhance productivity. The global crisis has not reduced the stock of global knowledge. South Asia has a lot to learn from USA and Japan. There is a huge room for South Asia to "catch up” with developed economies. This catch up can generate growth even if developed economies do not grow, although global growth is even better.

How will changes in global financial architecture, increased cost of capital and reduced access to capital impact growth? Changes in capital flows are not likely to have as big an impact on growth in South Asia, as it has had in Eastern Europe and other regions that relied more on foreign savings. South Asia's investments are largely driven by domestic savings. Its dependence on foreign savings is low. South Asia has also attracted capital flows that are less volatile. Remittances, which are more resilient compared to portfolio flows, have been the dominant form of capital inflows, exceeding foreign direct investment and other inflows into South Asia. However, as South Asia develops and as its capita income rises, South Asian entrepreneurs would switch from relying solely on banks as a source of capital to taping capital markets for capital. South Asia would actually benefit from increased global financial integration.

This global downturn called for counter-cyclical economic[1] management. South Asia has limited room for fiscal stimulus, given high debt-to-gross domestic product ratios. Reduced commodity prices have created some fiscal space that has been used for growth enabling infrastructure and safety nets. But this can quickly change as food prices and oil prices sky rocket. South Asia will not be able to finance huge food and fuel subsidies given high public debt. South Asia would become once more vulnerable to global commodity prices unless its domestic commodity prices are aligned with global commodity prices as many East Asian countries have tried to do (I will devote more on this in future entries)

So what will constitute robust and sustainable future growth for South Asia? If you'd like to share your ideas, send a comment and let's start a debate.